STOCK PICK: This Company Is Redefining The Concept of Money And Payments

A global digital payments provider with a healthy track record, great leadership, amazing market opportunity, and an even better product.

In the ever-evolving digital landscape, this next investment pick is a titan that has redefined the concept of money and payments. This company has continually embraced and pioneered disruptive technology, carving out a significant place in the daily lives of millions of consumers and businesses globally. With its strong foothold in more than 200 markets and a customer base transcending 100 currencies, the company's robust financial performance is driven by increasing user engagement and continuous innovation. 

With an impressive portfolio of solutions catering to every possible transaction need, this company provides a beacon of financial inclusion and freedom, turning the complex into simple with just a few clicks. 

If you want to invest in a company with a proven track record, exceptional leadership, and significant growth prospects in the burgeoning digital payments sector, look no further than PayPal Holdings, Inc.

Company Overview 

PayPal Holdings, Inc. is a leading global digital payment service provider established in December 1998 by Max Levchin, Peter Thiel, and Elon Musk (what hasn't Elon Musk had his hands in...?), among others. Its headquarters are located in San Jose, California. The company's primary service allows consumers and businesses to send and receive payments online, using modern technology to make financial services and commerce a more affordable and seamless process.

PayPal operates a proprietary payments platform that enables digital payments for consumers and businesses throughout the world. It's available in more than 200 markets, allowing customers to receive money in more than 100 currencies. Furthermore, customers can withdraw funds in 56 currencies, and even hold balances in their PayPal accounts in 25 different currencies.

For individuals, PayPal allows safe, simple, and flexible payments, whether online, on a mobile device, in an app, or in person. For businesses, PayPal provides a wide range of products and services that help anywhere from small to enterprise sized businesses to grow and operate internationally. Some of the leading products you might be familiar with include:

• PayPal: PayPal is a global digital payment service provider that allows consumers and businesses to send and receive payments online or on mobile devices. 

• PayPal Credit: PayPal Credit is a reusable credit line offered by PayPal, available at checkout when shopping online, allowing users to pay over time while providing instant access to purchases typical of a traditional credit card.

• PayPal Cash Plus account: A PayPal Cash Plus account is a type of PayPal account that allows users to hold and manage a balance in their PayPal account, make purchases, receive direct deposits, and even take advantage of PayPal's cashback program.

• PayPal Merchant Services: PayPal Merchant Services is a suite of products and tools designed for businesses that enables them to accept and manage online and in-person payments, send invoices, and access financing options.

PayPal also owns several subsidiaries that have helped expand its services and capabilities in the digital payment landscape:

1. Venmo: A mobile payment service that allows for the quick transfer of money between users. It's famous for splitting bills, paying friends, and other small transactions.

2. Braintree: A company specializing in mobile and web payment systems for e-commerce businesses, providing merchant services and payment gateway options.

3. Xoom Corporation: A digital money transfer service that allows users to send remittances, pay international bills, or reload phones for family and friends in over 160 countries globally.

4. Zettle: Acquired in 2018 (and formerly known as iZettle), Zettle is a Swedish fintech company that provides various business solutions, including payments, point of sales, funding, and partner applications. It is now available in the U.S. too.

5. Honey Science Corp: PayPal purchased this deal-finding service in 2019. Honey is a browser extension that helps online shoppers find coupons and discounts while they shop.

6. Swift Financial: Swift Financial offers business loans and funding solutions. PayPal acquired it to allow the expansion of the PayPal Working Capital offer. Swift can provide business loans of up to 500,000 USD.

These are just a few of the more well-known subsidiaries. Others include Simility, Chargehound, Happy Returns, GoPay, Paydiant, and Paidy - all making the global payment management processes and systems work smoothly.

A Leader In Its Industry

PayPal is seen as a bellwether in the digital payment industry. Its business model is well-diversified, with revenue streams coming from transaction fees, interest on loans, and other financial services. The company has consistently invested in technology and innovation to provide superior user experiences.

Despite facing competition from traditional banks, credit card companies, and other fintech firms, PayPal has managed to maintain a strong position in the market thanks to its brand recognition, large customer base, and strategic partnerships it has formed over the years. As digital payments continue to grow, PayPal remains well-positioned to capitalize on this trend.

Fun Fact about PayPal

An interesting fact that many people may not know about PayPal is its role in giving birth to the so-called "PayPal Mafia." This term refers to a group of former PayPal employees and founders who have since founded and developed additional technology companies.

Some members of the "PayPal Mafia" include Elon Musk, Peter Thiel, Max Levchin, and Reid Hoffman. After PayPal was sold to eBay for $1.5 billion in 2002, these individuals went on to create influential tech companies such as Tesla (Musk), SpaceX (Musk), LinkedIn (Hoffman), and Palantir Technologies (Thiel), among others. This group has significantly shaped the tech industry, and its collective influence and impact are a testament to the entrepreneurial environment at PayPal in its early days.

In terms of financial value, it is estimated that the companies created by the "PayPal Mafia" members are worth more than a trillion dollars in total, marking a notable legacy for PayPal beyond its own substantial achievements in the digital payments industry.¹

Why Invest In PayPal?

PayPal has a strong track record of setting the standard for the payments industry. Reasons I believe PayPal has the potential to be a multi-bagger long-term stock pick include its excellent leadership team, growth potential and market opportunity, and rock-solid financials. Here're the details.

The CEO & Leadership Team

Dan Schulman is the current CEO of PayPal and has been serving as the President and Chief Executive Officer of PayPal since 2015. Before joining PayPal, Schulman was Group President at American Express and President at Sprint's Prepaid Group. He has a reputation for focusing on innovation and growth, and under his leadership, PayPal has seen significant expansion and success.

Under his leadership, PayPal has been named one of the top companies on JUST Capital and Forbes' JUST 100 list, featuring "companies doing right by America."² 

The leadership team at PayPal has been rated a B- by employees on Comparably,³ and the CEO, Dan Schulman, has a 91% approval rating on Glassdoor.com.⁴

PayPal's Future & Growth Potential

PayPal's growth plans are primarily centered around the following key areas:

1. Expanding Digital Payment Services: PayPal continues to invest in and grow its core digital payments business, focusing on increasing adoption among consumers and merchants and driving increased engagement among its existing user base.

2. Capitalizing on the Growth of E-commerce: The company is poised to benefit from the global increase in online shopping. As e-commerce grows, so does the demand for safe and convenient online payment options.

3. Investing in Mobile Payments and Fintech: With the rise of mobile transactions, PayPal continues to expand its mobile payment capabilities. This includes investments in its own mobile services, like the PayPal and Venmo apps, as well as acquisitions of other fintech companies that can bolster its capabilities.

4. International Expansion: PayPal is making strategic investments in markets outside the U.S., including emerging markets where digital payments are just beginning to gain traction.

5. Cryptocurrency Services: PayPal has also started allowing users to buy, sell, and hold selected cryptocurrencies, which could represent a significant growth opportunity as the adoption and use of cryptocurrencies continue to increase globally.

Market Opportunity

As for market potential, PayPal operates in the large and rapidly growing digital payments market. The total transaction value in the global digital payments market is projected to reach $9.46 trillion in 2023, according to Statista. The total transaction value is expected to show a compound annual growth rate (CAGR) of 11.80%, resulting in a projected total of $14.78 trillion by 2027.⁵

Given its strong brand, widespread acceptance, and comprehensive suite of services, PayPal is well-positioned to capitalize on this growth.

Financials

• Return on Equity (ROE): 13.37%

• Quarterly Earnings Growth (yoy): 56.2%

• Quarterly Revenue Growth (yoy): 8.60%

• Total Cash: $10.66 billion

• Total Debt: $11.58 billion

• Levered Free Cash Flow: $3.42 billion

• Net Income Avi to Common (ttm): $2.7 billion

The above financials are as of this writing on June 11, 2023.⁶

I point out these main financials because each of the above strengthens the argument that PayPal is in great financial shape for any condition.

High ROE tells me they are wise in how they use Shareholder's money to grow the business. I prefer double-digit growth for ROE. 

Quarterly revenue growth at 8.6% with Quarterly Earnings Growth at 56.2% tells me they are growing revenues but earnings even faster, indicating they are cutting costs and spending wisely. And, $10 billion in Cash is no small number by any means, which gives them options and financial flexibility. 

They have billions in cash flow after all expenses (levered free cash flow). With so much Cash on hand, they have more than enough to pay any net income to common shareholders indicating they are not just valuable on paper.

Competitors to PayPal

PayPal has a 50.32% market share in the online payment processing environment.⁷

Other competitors in the payment processing software market include Stripe, Braintree, Amazon Pay, and Shopify Pay Installments. In the payment-management market, the top alternatives for PayPal's payment-management tool are Stripe, Stripe Connect, and Adyen.

PayPal also faces competition in the mobile payments market from companies such as Apple Pay, Google Pay, and Square Cash App. 

Potential Risks of Investing In PayPal

Investing in any company, including PayPal, carries a degree of risk. Some of the potential risks associated with investing in PayPal might include:

1. Regulations: PayPal operates in a heavily regulated industry, and changes in laws, regulations, or government policy related to banking, consumer protection, or electronic funds transfers could affect the company's operations. Regulatory changes could lead to increased costs, fines, or restrictions on PayPal's ability to offer its services.

2. Competition: The digital payments sector is highly competitive, with several major companies, including banks, credit card companies, and tech companies, all offering similar services. Increased competition could lead to reduced market share or pressure to lower prices.

3. Cybersecurity: As a digital payment provider, PayPal is a target for cyber-attacks, fraud, and data breaches. While PayPal invests heavily in security, any perceived or actual breach could harm the company's reputation and result in a loss of users.

4. Operational Risk: PayPal's operations depend on its ability to process a large number of transactions quickly and accurately. Any interruptions or malfunctions in PayPal's systems could disrupt its services, harming its reputation and financial performance.

5. Foreign Exchange Rates: PayPal operates globally, and its financial results can be affected by fluctuations in foreign exchange rates.

6. Market Risk: Broad market factors and global economic conditions can affect PayPal's performance. For example, a downturn in the economy could lead to reduced consumer spending and fewer transactions processed through PayPal.

The Bottom Line

PayPal has 435 million active accounts, $1.36 trillion in total payment volume, and 22.3 billion payment transactions and counting.⁸ They own 10+ subsidiary companies in sister industries, offer a plethora of payment products for consumers and small businesses, and own a majority market share. Finally, their financials are in good order, for the cherry on top.

When I asked my wife if she could imagine a world without PayPal, she answered, "No, because of Venmo! Everyone uses Venmo, it's so convenient, and it'd be crazy if Venmo didn't exist." I'm sure many could say the same about some of their other products. For these reasons, I'm long on PayPal for years to come.

1. https://www.businessinsider.com/meet-the-paypal-mafia-the-richest-group-of-men-in-silicon-valley-2014-9

2. https://about.pypl.com/who-we-are/executive-leadership/dan-schulman/default.aspx

3. https://www.comparably.com/companies/paypal/executive-team

4. https://www.glassdoor.ca/Reviews/PayPal-Reviews-E9848.htm

5. https://www.statista.com/outlook/dmo/fintech/digital-payments/worldwide

6. https://finance.yahoo.com/quote/PYPL/key-statistics?p=PYPL

7. https://fortunly.com/statistics/paypal-statistics/

8. https://about.pypl.com/who-we-are/history-and-facts/default.aspx